Ohio Supreme Court Allows for Recovery of Attorneys Fees Upon Mortgage Reinstatement
The Ohio Supreme Court recently issued a favorable ruling for lenders who want to enforce attorney fee provisions in their loans. In Wilborn v. Bank One Corporation, 2009 Ohio 306 (2009), the Court found that “a provision in a residential mortgage contract requiring a defaulting borrower to pay a lender’s reasonable attorney fees as a condition of terminating foreclosure proceedings and reinstating the loan is enforceable and not contrary to Ohio public policy.”
The case involved an appeal of eleven separate plaintiffs in a class action challenging the validity of an attorney fee provision contained in a residential mortgage. In ten of the eleven cases, the bank brought a foreclosure action against the borrower and the borrower sought to reinstate the loan by paying the full amount due prior to judgment. Under the mortgage, the borrower was required to pay the bank’s foreclosure related attorney fees to receive reinstatement.
The borrowers objected to paying the attorney fees for three principle reasons. First, the borrowers argued that the attorney fee provisions were an unlawful penalty upon a debtor under common law. Second, the borrowers argued that the attorney fee provisions were void because the contracts were not the product of free, bilateral negotiation. Third, the borrowers argued that the attorney fee provisions were unenforceable under R.C. § 1301.21.
The Ohio Supreme Court rejected the borrowers’ argument that the attorney fee provisions imposed an unlawful penalty. To reach this decision, the Court distinguished between the rights redemption and reinstatement. The right of redemption is an absolute right that allows a borrower to redeem the subject property even after its public sale and thereby terminate the foreclosure proceedings without any obligation to pay attorney fees. While, the right to reinstate is a private contractual right that arises solely from the terms of the mortgage. “The defaulting borrower’s agreement to pay the lender’s attorney fees . . . is a reasonable exchange for the right to require the lender to reinstate the defaulted mortgage and forebear on the right to foreclose, be presently paid in full, and sever the relationship with the defaulted borrower.”
In addition, the Court rejected the argument that the attorney fee provisions were invalid because they were not the product of free negotiation between parties with equal bargaining power. While the Court recognized that the individual mortgages were not negotiated between borrower and lender, the Court went into a lengthy discussion regarding the history of the Fannie Mae and Freddie Mac forms. Based upon the historical background and for public policy reasons, the Court determined that these forms were the products of extensive negotiation and were enforceable.
Lastly, the Court rejected the borrowers arguments that the attorneys’ fee provisions were unenforceable under R.C. § 1301.21, which permits attorney fee provisions in commercial loans contracts involving more than $100,000. The borrowers argued that the statute implies that attorney fee provisions are impermissible in consumer loans. The Court confirmed that R.C. § 1301.21 applied only to commercial loans and did not prohibit attorney fee provisions in consumer loans.
Based on the Court’s decision, lenders should review their current mortgage forms and make sure they require reimbursement of all attorney fees as a condition to reinstatement.
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William T. Repasky practices with the Litigation Department at Frost Brown Todd. He focuses on lending and commercial services; banking litigation and financial institutions.